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Technology Stocks : CMGI What is the latest news on this stock? -- Ignore unavailable to you. Want to Upgrade?

To: kcmike who wrote (11344)	7/1/1999 11:26:00 PM
From: PAL	Read Replies (3) \| Respond to of 19700

Mike: I did not go into detail about margin requirement and plead guilty in giving the impression that there is no risk in implementing a triple play. My subsequent post warned about that. Let us briefly look at the scenario: Buy 100 CMGI at $110 = outflow $ 11,000 Sell Jan01/110 put at $43 = inflow $ 4,300 Sell Jan01/110 call at $ 52 = inflow $ 5,200 Net outflow $ 1,500. Fallacy: If I have $ 15,000, I can do 1000 shares of CMGI triple play. WRONG. There is margin requirement. Here it is: Let us start with only $ 11,000 in the account, you use that to buy 100 shares of CMGI. Then you sell put and call. Now you have $ 9,500 cash plus long 100 sh of CMGI and short 1 put and 1 call. Now what is the margin requirement? 1. there is no margin requirement for the call because it is covered. 2. now look at the put, it is a naked put. one brokerage firm has the following maintenance requirement: a) 25 % of underlying stock + premium minus out of the money, Let us calculate: 25 % of $ 11,000 = $ 2,750 plus $ 4,300 equals $ 7,050. Since it is on the money, there is no subtraction. b) what is the coverage for the margin requirement? i) cash $ 9,500 ii) 50% to 70% of CMGI stock ( I assume that CMGI was not bought on margin since it won't allow much room if the stock heads south). This means additional, coverage of $ 5,500 to $ 7,700 iii) total coverage: $ 14,000 to $ 17,200 against $ 7,050 requirement. Please check with OLDE margin department. That proceeds of $ 4,300 should be able to be used for cover. As a matter of fact: look at item ii); from the stock itself you get coverage of $ 5,500 to $ 7,700 depending if CMGI is fully marginable or just 50%. If it is fully marginable, then $ 7,700 should be enough to cover $ 7,050 for that day . If the stock rises, you said that you have to send more deposit since 25% of the underlying stock increases as well. This is not the case: a) although that 25% increase, the premium decreases and don't forget, MINUS out of the money amount. If the stock runs away, in theory the margin requirement can go to zero; therefore each broker adds a rule : Subject to a minimum, for examplea coverage of $ 2,000/per contract One thing you are right on. You cannot just have $ 1,500 and go to a broker and say: I want a triple play, even if CMGI is fully marginable, and for that day the stock itself is enough to cover the margin requirement. This relates back to the sentence printed in italics above. As always it is better to have enough cushion in the account to avoid margin call. If that happen, you are forced to sell at the low. How much cushion? I do not know the answer, but enough that each person feels comfortable to take the risk and be willing to bear the consequences. The cliche holds all the time "never invest more than you can afford to lose (and lose sleep)". Best regards, Paul